Kilroy Realty Corporation — FY 2010 Form 10-K
Reporting period: Year ended December 31, 2010; filed February 10, 2011. This summary covers the full fiscal year, with fourth-quarter figures noted separately. Kilroy is a West Coast office and industrial REIT; substantially all operations are conducted through Kilroy Realty, L.P., which the Company controlled with a 96.8% partnership interest at year-end.
Business context and financial results
At year-end, the stabilized portfolio comprised 140 buildings and 14.0 million rentable square feet, primarily in California. Occupancy was 89.1% overall: 87.5% for office and 93.9% for industrial properties.
| Metric | FY 2010 | Prior comparable period |
|---|---|---|
| Total revenue | $302.0 million | $279.4 million in 2009; up 8.1% |
| Net income | $19.9 million | $38.0 million in 2009; down 47.7% |
| Net income available to common stockholders | $4.5 million; $0.07 per share | $21.8 million; $0.53 per share |
| Funds from operations (FFO) | $106.6 million | $107.2 million in 2009; down 0.5% |
| Net operating income (NOI) | $216.5 million | $203.2 million in 2009; up 6.5% |
| Cash provided by operating activities | $119.8 million | $125.0 million in 2009; down 4.1% |
| Cash used in investing activities | $701.8 million | $50.5 million in 2009 |
| Cash provided by (used in) financing activities | $586.9 million | $(74.2) million in 2009 |
Fourth-quarter revenue was $82.9 million and NOI was $59.8 million. Income from continuing operations was $4.4 million; net income available to common stockholders was $1.5 million, or $0.02 per share.
Year-end total assets were $2.82 billion, including net real estate assets of $2.54 billion. Cash and cash equivalents were $14.8 million, with $341 million of undrawn capacity under the $500 million revolving credit facility. Restricted cash was an additional $1.5 million. Total debt was approximately $1.45 billion in gross principal (the balance sheet reports debt net of discounts). Debt plus preferred equity represented 45.8% of market capitalization; 89% of debt was fixed-rate and 11% variable-rate. The Company reported compliance with debt covenants.
The filing does not present a single consolidated operating-margin measure. As a property-level indicator, NOI was 71.7% of revenue in 2010 versus 72.7% in 2009, calculated from reported NOI and revenue. FFO is a non-GAAP supplemental measure and does not reflect capital expenditures or leasing costs.
Material changes versus 2009
- Revenue and total portfolio NOI increased, largely reflecting ten office buildings acquired in eight transactions for approximately $697.8 million. Stabilized year-end occupancy rose to 89.1% from 82.8%, though this comparison reflects portfolio changes and leasing activity.
- Core office NOI was nearly flat, down 0.2%; total office NOI rose 8.6%, primarily due to acquisitions. Industrial NOI fell 8.5%, with core industrial NOI down 8.2%.
- Net income available to common stockholders declined sharply as higher depreciation and interest costs, a $4.6 million loss on early extinguishment of debt, and other factors more than offset higher revenue and lower G&A. 2009 included a $4.9 million debt-extinguishment gain.
- Interest expense increased 30.0% to $59.9 million; the weighted-average effective interest rate cited in MD&A rose from approximately 5.2% to 6.2%. FFO was broadly stable despite the increased asset base.
- Investing outflows increased primarily because of $637.6 million cash paid for acquisitions and higher property and leasing expenditures. Financing included a $299.8 million net common-stock offering and new senior notes of $250 million due 2020 and $325 million due 2015.
- Common dividends declared declined to $1.40 per share from $1.63 in 2009. The quarterly rate was $0.35 throughout 2010.
Outlook, commentary, risks, and unusual items
- Management described market conditions as challenging, with slow economic growth, California-specific weakness, and downward pressure on rents. It reported some improvement in occupancy and stabilization in rental rates and concessions in certain submarkets, but offered no formal earnings or FFO guidance.
- Management said it currently believed it could maintain 2010 distribution levels during 2011 to meet REIT requirements; distributions remain subject to board discretion and cash availability. The revolver restricts distributions, including a covenant limiting dividends to 95% of FFO.
- Approximately 10.9% of stabilized portfolio space was available at year-end. Leases covering 5.8% and 10.3% of leased rentable area were scheduled to expire in 2011 and 2012. Management estimated portfolio cash rents were about 10% above quoted market rents, and 2011 expirations about 15% above market, creating renewal and re-leasing risk.
- The company began a redevelopment of an approximately 300,000-square-foot El Segundo office property in 2010. Estimated total investment was approximately $50 million, with completion expected in the third quarter of 2011 and stabilization in 2012. Management also anticipated pursuing acquisitions and evaluating other redevelopment and land opportunities.
- Debt maturities included approximately $75 million in 2011 and $304 million in 2012. The 2010 credit facility matures in August 2013, with a one-year extension option. The filing identifies refinancing access, interest rates, tenant defaults, California economic conditions, lease renewals, and property values as significant risks.
- All but one property was in California, exposing the portfolio to regional economic and regulatory risks as well as earthquake and environmental liabilities. Earthquake coverage includes substantial self-insurance; management noted insurance limits and terms may not cover all losses.
- Unusual items included a $1.0 million reversal of prior bad-debt provision following a tenant-related litigation settlement; the company received $3.6 million in 2010 and a further $1.0 million in January 2011. No impairment losses were recorded for the periods presented. The company reported no litigation expected to have a material adverse effect and no off-balance-sheet arrangements.
- Subsequent events included a January 2011 $135 million mortgage loan at 4.27%, secured by 303 Second Street, and a $33 million acquisition of a San Francisco office building. The company also reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements.
Most important facts for investors to verify
- Whether post-acquisition leasing and same-property performance can sustain occupancy and NOI, particularly in industrial assets and core office properties.
- The timing and cost of 2011–2012 lease expirations, rent roll-down versus market, and tenant-improvement and leasing costs.
- Debt refinancing capacity and covenant headroom around 2011–2012 maturities, including the impact of the 2011 mortgage and acquisition.
- Cash available for common distributions after preferred distributions, debt service, redevelopment, and recurring leasing and capital spending; FFO alone does not capture these costs.
- Concentration and renewal exposure: the 15 largest tenants represented 39.5% of annualized base rent, and California accounted for nearly the entire portfolio.